Monday, April 21, 2014

Procrustes at the FCC

The Federal Communications Commission has a Procrustean problem. The agency would do well to acknowledge it as a means of reforming its regulatory process.

I borrow from FTC Commissioner Maureen Ohlhausen's address, "The Procrustean Problem with Prescriptive Regulation," delivered at the Free State Foundation's Sixth Annual Telecom Policy Conference on March 18. If you missed the conference and haven't seen the C-SPAN video of Commissioner Ohlhausen's speech or read it, you should. It ought to be required reading at the FCC.

In her speech, Commissioner Ohlhausen briefly relates the Greek myth of Procrustes:
"Procrustes was a rogue blacksmith, a son of the sea god Poseidon, who offered weary travelers a bed for the night. He even built an iron bed especially for his guests. But there was a catch: if the visitor was too small for the bed, Procrustes would forcefully stretch the guest’s limbs until they fit. If the visitor was too big for the bed, Procrustes would amputate limbs as necessary to fit them to the bed. Eventually, Procrustes met his demise at the hand of Greek hero Theseus, who fit Procrustes to his own bed by cutting off his head."

According to Commissioner Ohlhausen, "[t]he general lesson of Procrustes is a warning against the tendency to squeeze complicated things into simple boxes, to take complicated ideas, technologies, or people, and force them to fit our preconceived models." Hence, regulators should resist the urge to simplify – to think they have the expertise or knowledge to simplify – and learn to tolerate complexity.

How should regulators confront the Procrustean problem? Commissioner Ohlhausen offers two fundamental principles, especially for those regulators who exercise authority in markets in which technology plays a large role: (1) embrace regulatory humility and (2) focus on evaluating consumer harm. As Commissioner Ohlhausen puts it: "Because it is so difficult to predict the future of technology, government officials…must approach new technologies and new business models with a significant dose of regulatory humility."

With regard to the second principle, what Commissioner Ohlhausen says about the FTC should be equally applicable to the FCC as well: "By focusing on practices that are actually likely to harm consumers, the FTC has limited its forays into speculative harms, thereby preserving its resources for clear violations. I believe this self-restraint has been important to the FTC’s success in tackling a wide range of disparate problems without disrupting innovation." The emphasis is on protecting consumers, not protecting competitors.

To adhere to the principles of embracing regulatory humility and focusing on consumer harm, Commissioner Ohlhausen emphasizes a point I have made in this space (literally) countless times: an ex post enforcement approach, based on the filing of individual complaints, is preferable to ex ante prescriptive regulations. As she puts it, the ex post enforcement method, employed by the FTC, "typically focuses on actual, or at least specifically alleged, harms rather than having to predict future harms more generally." In contrast, the FCC's general resort to prescriptive ex ante rulemakings necessarily suffers from systemic knowledge problems that are exacerbated in the context of a dynamic market with fast-changing business models and technologies.

Finally, and importantly, Commissioner Ohlhausen rightly takes on the invocation of the now common shibboleth, "data-driven." Too many regulators, including those at the FCC, believe that if they simply repeat the well-worn mantra "our decisions are data-driven" that their actions ought to be accepted, without question, as proper. As Commissioner Ohlhausen reminds us: "[D]ata isn't knowledge or wisdom. 'Data-driven' decisions can be wrong. Even worse, data-driven decisions can seem right while being wrong."

I was pleased that Commissioner Ohlhausen suggested some skepticism is warranted regarding ritual incantations of "data-driven" decision-making because, frankly, I have been doing the same for years. As I said in a blog three years ago, "data, no matter how sweet-sounding the oft-repeated 'data-driven' mantra … is viewed differently, and put to different uses, depending upon one's regulatory philosophy and perspective." Or, to the very same point, in a 2010 piece I suggested Chairman Genachowski's "data driven" mantra, even then, already was being overworked because "regulatory philosophy matters a lot" in deciding how to interpret and make use of data.
I'm certain that Commissioner Ohlhausen doesn't mean to imply that regulators should not seek to obtain relevant, accurate data, or ignore it when they have it. And I don't either.
But I do want to suggest that, by following Commissioner Ohlhausen's two fundamental principles – embracing regulatory humility and focusing on consumer harm – the temptation of regulators to cover shoddy reasoning by invoking the "data-driven" mantra may be lessened. That is to say that abiding by the principles enunciated by Commissioner Ohlhausen will lead to sounder decisions that are less dogmatically pro-regulatory. Overall consumer welfare is more likely to be improved by such decision-making.
In the next year, the FCC will be making some important decisions in major proceedings – for example, in the incentive auction, the Comcast-Time Warner Cable merger, and IP transition proceedings, to name but three. Free State Foundation scholars have addressed issues in each of these proceedings before, and I am certain we will do so again in the months to come. I don't want to do so here.
Except to say, in closing, that I am confident the Commission's decisions in these matters, and others, will benefit consumers most if Chairman Tom Wheeler and his colleagues take to heart Commissioner Ohlhausen's message concerning the virtue of regulatory humility.
That means slaying Procrustes in his own bed at the FCC.

Thursday, April 10, 2014

The FCC Should Not Preempt State Restrictions on Municipal Broadband

In the wake of the D.C. Circuit’s Verizon v. FCC decision, Federal Communications Commission Chairman Tom Wheeler laid out plans for the Commission’s approach to broadband. Those plans included a proposal to potentially preempt state restrictions on the ability of cities and towns to offer broadband services to their communities. At the Consumer Federation of America’s Assembly on March 21, Chairman Wheeler reiterated his plans to address state restrictions preventing state localities from building out municipal broadband services.

Chairman Wheeler should not move forward with these plans. First, Section 706 most likely does not provide FCC authority to preempt state laws. Second, government-funded networks do not bring real competition to localities and, most often, eventually cause more harm than good. Finally, the widespread failure of government-owned broadband projects proves that it would be unwise for Chairman Wheeler to push municipalities to pursue these often harmful ventures.

Nearly twenty states restrict local governments from entering into the business of providing broadband Internet service. These restrictions are sound policy, as they prevent local government conflicts of interest with the private sector, and they protect other local government programs and local taxpayers from the potential financial losses stemming from risky municipal broadband projects.

FSF scholars have discussed the problems stemming from government-owned broadband systems at length. In his February 26 Perspectives, Senior Adjunct Fellow Seth Cooper recently analyzed the legal implications of the FCC’s tentative plan to potentially preempt state-level restrictions on municipal broadband projects. Mr. Cooper found that “preemption would undermine local government accountability to state governments and to taxpayers” and “any attempt to interfere with the relationship between states and their local governments will run up against basic free market and federalism principles.” 

Federal law contains no clear statement authorizing preemption of state restrictions on their cities and counties going into the telecommunications or broadband Internet business. The U.S. Supreme Court has previously rejected federal preemption of state prohibitions on telecommunications services in Nixon v. Missouri Municipal League (2004). The Supreme Court expressly rejected claims that Section 253(a) of the Communications Act preempted a state statute prohibiting its cities and counties from offering telecommunications services. The Court based its decision on the "clear statement" rule and constitutional federalism problems posed by preemption of fundamental state sovereign functions. Also, a 1997 order by the FCC rejecting the preemption of a Texas restriction on local governments providing telecommunications services is an agency precedent that weighs against preemption.

Additionally, the principles of cooperative federalism dictate that a federal agency should not grant counties or cities powers that their respective states did not delegate to them. Chairman Wheeler’s February 19 statement, which included a proposal to examine “legal restrictions on the ability of cities and towns to offer broadband services to consumers in their communities,” has been characterized and reported as an effort to bring broadband to the citizens of municipalities. Municipalities are purely creations of the state. Municipal residents are citizens of the state. These citizens, as voters, indicate their political views, including whether they support legislation restricting municipal broadband initiatives, by electing certain state officials, from members of the state legislature all the way up to governor. FCC preemption of state-imposed restrictions on municipal broadband would impose on state citizens policies they do not support and would deprive them of recourse through their elected representatives.

While the D.C. Circuit arguably may have broadly construed the authority granted to the FCC under Section 706 in its recent Verizon decision, this authority is not likely to be as broad as the Commission's regulatory ambitions. And it most likely does not allow the FCC to interfere with state control over cities and counties to encourage broadband deployment absent a clear statement of intent by Congress. Constitutional principles, as well as Supreme Court and agency precedent, weigh against the legal support for FCC preemption of state restrictions.

There are also many fact-based reasons why preempting state restrictions on municipal broadband initiatives is unwise. In his March 7 Washington Times article, “FCC, Broadband and Fallacy of Government Competition,” FSF President Randolph May discussed how government systems thwart competition rather than enhance it, despite what Chairman Wheeler may believe. Mr. May concluded that “government systems pose inherent conflicts of interest with private-sector companies” by competing with them for rights-of-way, financing, and subscribers. And, these networks are generally subsidized directly by taxpayers or by government bonds carrying below market interest rates. Because building and managing broadband networks is not within the “traditional bailiwick and presumed competence” of local governments, these systems most often fail, and leave taxpayers and government bondholders “holding the bag."

I discussed the many examples of failed local government communications networks in a recent blog, including the recently publicized failure of Burlington, Vermont’s broadband network, Burlington Telecom (BT). For the past two years, BT has been fighting the claims of Citibank, its primary creditor, that BT owes it $33.5 million; the proposed settlement is for $10.5 million, which will be funded “largely” through non-taxpayer resources. Not surprisingly, the city has had to look to the private sector to help in funding the settlement.

Unfortunately, BT is only the latest failure in a longstanding pattern of money-losing municipal broadband projects. The towns of Mooresville and Davidson, North Carolina, faced multi-million dollar debts after acquiring the MI-Connection Communications System from the bankrupt Adelphia Communications cable systems. Utah’s UTOPIA network operated at a loss from 2003–2012, which caused “serious damage to the agency’s financial position” and resulted in total net assets of negative $120 million by 2011. Chattanooga, Tennessee’s Electric Power Board (EPB) network was built almost entirely at taxpayer expense. And last February, the Iowa state government sought to sell off its Iowa Communications Network. The Iowa network is one of the oldest government telecom systems in existence, but the debt it accrued over its history rendered the system unsustainable. Other municipal “broadband busts” include Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency.  Citizens Against Government Waste’s recent publication discusses these and other examples of poorly managed broadband networks, and CAGW urges the FCC not to push municipalities into competition with the private sector.  

In sum, Chairman Wheeler should not pursue his proposal attempting to “enhance competition” by encouraging governments to compete with private sector companies. There is plenty of evidence, both legal and factual, supporting the conclusion that preempting state restrictions on government-owned broadband systems is unsound and unwise. Instead, as Mr. May stated in his Washington Times article, “The proper way to encourage competition is to remove existing, costly regulations that no longer are necessary in today’s competitive communications environment and to refrain from adopting or threatening to adopt new ones.”

Wednesday, April 09, 2014

Maryland Still Compares Poorly to Other States’ Tax Climates

The Tax Foundation recently released the latest edition of its annual Facts & Figures 2014: How Does Your State Compare? The report ranks state tax rates and burdens in order to provide an objective perspective on how individual states measure up to a national average.

Maryland’s business tax climate still needs improvement. As I discussed in a blog last October, the Tax Foundation’s State Business Tax Index measures how each state’s tax laws affect economic performance. The Index named Maryland among the ten worst states with respect to its business tax climate. Maryland remained ranked 41st in the more recently released Facts & Figures report.

Additionally, Maryland received a poor overall tax climate ranking from the Tax Foundation’s Annual State-Local Tax Burdens Rankings. That report was released April 2 and uses the most recent data available as of January 2014. For each state, the report computes tax burden by totaling the amount of state and local taxes paid by state residents to both their own and other governments and then divides these totals by each state’s total income. 

In fiscal year (FY) 2011, Americans paid an average of 9.8% of their income in state and local taxes. Maryland ranked seventh highest in the U.S. for its state-local tax burden for FY 2011 (10.6%).
Maryland imposes a higher-than-average burden on its citizens and received a worse ranking than its local counterparts: Delaware ranked 15th (10.1%); West Virginia ranked 19th (9.7%); Virginia ranked 30th (9.2%). As a unique state-local entity, DC is not included in the rankings, but it would rank 20th (9.7%). For FY 2011, New Yorkers had the highest burden, paying 12.6% of their collective income in state and local taxes. New Jersey (12.3%) and Connecticut (11.9%) came in 2nd and 3rd, respectively. Wyoming (6.9%), Alaska (7.0%), and South Dakota (7.1%) had the lowest burdens.
States with high-earning residents tended to have the highest tax burdens. Maryland residents had the fourth highest average income in the U.S. in 2011 ($52,805). Maryland also had among the highest property tax burdens in America that year. Maryland ranked third highest in individual income tax collections per capita, trailing only New York and DC (and Maryland would rank second highest if DC is not considered). Maryland had the tenth highest individual income tax collections per capita as of FY 2012, which is a minor improvement from FY 2011.
While state and local tax burdens across the U.S. decreased on average in FY 2011, tax burdens increased in Maryland, Delaware, and DC. According to the rankings, “the driving force behind a state’s long-term rise or fall in the tax burden rankings is usually internal and most often a result of deliberate policy choices regarding tax and spending levels or changes in state income levels.”

As I urged in my last blog on state tax issues, it would be wise for Maryland to consider the success of other states, particularly its neighbors with lower tax burdens, and to implement changes to improve its local tax climate. In particular, if Maryland wishes to remain competitive with its neighboring states and prevent job losses, it should establish tax policies that attract and retain private sector businesses and decrease individual tax burdens.

Wednesday, April 02, 2014

Support Grows for Banning Internet Access Taxes Forever

Thanks to the Internet Tax Freedom Act of 1998, consumers have been able to benefit from access to the Internet free from state and local taxes for well over a decade. And, the digital marketplace has grown and thrived thanks, at least in part, to this access tax ban. However, in November of this year, the moratorium on Internet access taxes expires unless Congress takes action to extend the ban or make it permanent.  

In a Perspectives published in October of last year, I discussed the many positive effects of free Internet access. The current regime prohibiting Internet access taxes has fostered economic growth and investment, technological innovation, and broadband deployment and adoption. For instance, a 2011 McKinsey study ranked the United States as the most prominent country in the “global Internet supply ecosystem,” attaining more than 30% of global Internet revenues and more than 40% of net income. If an Internet access tax were imposed, the thriving Internet economy may be threatened.

Thankfully, support for a permanent moratorium on Internet access taxes has been growing in the House and the Senate. And, interest groups like have made available a petition to allow the public to voice their support for continuing to ban Internet access taxes. The enactment of a permanent ban on Internet access taxes will promote the availability of information, continued technological innovation, and the economic success of the digital marketplace.

Snatching Victory From the Jaws of Defeat: Incentive Auction Should Be Win-Win-Win for Consumers, Government, and Industry

By Gregory J. Vogt, Visiting Fellow

The upcoming incentive auction, where a projected 120 MHz of spectrum may potentially be reallocated from TV broadcasting to mobile broadband, is a vital part of the Obama Administration's original goal of reallocating 500 MHz of spectrum for mobile broadband use. As described in this blog, this effort holds the promise of improving consumer welfare, meeting government competition and financial needs, and addressing the wireless carriers’ need for more spectrum. As others have done in the past, a recent paper by William Lehr suggests that competition should be the most important policy that should govern auction design. Although competition is important, the end result sought by these policy conclusions is misguided.

Given the potential defeat caused by a growing shortage of mobile spectrum, the incentive auction could be a jaw-snatching victory, a veritable win-win-win for consumers, government, and industry. All policymakers agree that obtaining the maximum amount of repurposed spectrum is critical to achieving the purpose of the incentive auction. So with this rare bipartisan policy agreement, what could possibly stand in the way of a resounding success?

Informal government statements have clouded the ability to achieve this purpose.  Chairman Wheeler has not announced whether he will recommend that the Commission place restrictions on bidder participation. But he has implied that he might ensure “that multiple carriers have access” to spectrum, referring to the Justice Department’s rather tepid speculation that large mobile companies, such as AT&T and Verizon, might be motivated to horde spectrum in order to “foreclose” competition. And both T-Mobile and Sprint have encouraged these statements by urging the FCC to restrict the amount of spectrum that the largest mobile broadband providers could bid for in the incentive auction. 

It would be bad public policy to introduce into the incentive auction an additional condition of “fairly distributing” spectrum among multiple carriers rather than simply auctioning the spectrum to the highest bidder. Such government manipulation might well prevent the incentive auction from achieving its overarching goal of maximizing the amount of repurposed spectrum, a concern which some broadcasters have raised

FCC history demonstrates that auctions with significant conditions, such as one that would steer license grants to a subset of participants, lengthens the time between auction and license grant, embroils the FCC in contested legal proceedings, and largely fails to achieve the purpose for which the targeting was imposed.

First, the 700 MHz D Block auction contained a restriction that the spectrum be dedicated to jointly providing a First Responder network and private mobile spectrum, including a minimum bid amount. The cost uncertainties surrounding the obligation most probably caused the failure to achieve the minimum bid amount. That spectrum is still not used 17 years later, but it is now slated for exclusive government use by the Middle Class Tax Relief and Job Creation Act.

Second, the C block of the same auction contained an "open access" requirement that obligated the auction winner to permit any device or application to be operated on the spectrum. These requirements have been compared to the 1960s era Carterfone decision that imposed an all-device obligation on monopoly wireline telephone companies. At the time of the auction, it was persuasively argued that the eventual auction price was $3.1 billion (or at least 40 percent) lower than would have been achieved without the restriction. Of course, under the D.C. Circuit’s recent decision vacating the net neutrality anti-discrimination and no-blocking rules, such an “open access” restriction has yet to be legally justified, particularly given the competitive broadband market. 

Third, the entrepreneur block of the PCS auction (also termed the C block) was reserved for companies that had less than $125 million in annual revenues and $500,000 in assets to promote participation by small businesses. A study by Fred Campbell has shown that the restrictions produced 61 percent less revenues than later unrestricted PCS auctions achieved. This same study and another by Tom Hazlet and Babette Boliek demonstrated that the restriction seriously delayed license grants, and many licenses were tied up in bankruptcy for years. Over half of the licenses had to be returned to the government. And perhaps most significantly, Mr. Campbell’s study showed that the restriction did not increase the long-term participation of small businesses, which largely transferred their licenses to existing players in the after-market. This, of course, meant that taxpayers were not fully compensated for the spectrum because the entrepreneurs received part of the proceeds.

Fourth, even designated entity ("DE") participation in auctions have produced skewed bidding results, often delaying the results of auctions. Given that small companies most often choose to sell their licenses rather than remain in the market for the long-run, it is doubtful that the purpose of the designated entity rule is being fully achieved. Although I express no opinion here on whether promoting access to spectrum for truly small entities outweighs the detriments, neither T-Mobile nor Sprint come anywhere even remotely close to being a very small entrepreneur defined as a designated entity. 

The following is a summary of these auction results.

Auction with Conditions
Reduced Revenues
License Delays
700 MHz F block (First Responder)
700 MHz C Block (open access)
no, but rule contested elsewhere
PCS C Block (entrepreneurs)
Various auctions (DE)
probably not

Broadcaster fears of achieving sufficient and timely auction payments likely will have a dampening affect on the amount of spectrum volunteered in the incentive auction. Because history demonstrates a high risk that significant bidder conditions will reduce government revenues, delay licensing, and fail to achieve their intended purpose, the government should stick to the goal all policymakers agreed to in the first place: promote the maximum amount of bidder participation. Refusing to adopt bidder restrictions is essential to meeting that goal. Failing to do so risks snatching defeat from the jaws of victory.

If it were up to me, I’d take the win.